Wednesday, October 23, 2013

SEC votes to allow full crowdfunding

The full Securities and Exchange Commission voted today to approve rules allowing full crowdfunding. This means that, in short order, you will be able to sell stock in your small or startup company over the Internet.

Title 3 of the JOBS Act means that issuers can sell securities online to anyone. The SEC voted to create a new SEC Act exemption to do so. The amount of money you can raise and the amount of money you can invest is limited, however. SEC Staff Members John Ramsey and Sebastian Gomez were two of the authors of this exemption. Ramsey noted the new rule requires crowdfunding intermediaries to register with the SEC and FINRA. The new rules create an entirely new type of business financing firm: a Funding Portal (FP). Portals bring investors, companies together. He noted that FINRA will issue a regulatory notice on FPs.

SEC Staff Member Lela Bond noted that the proposed rules exclude foreign companies, investment companies, companies with no business plan, and companies looking to raise money for the purpose of financing a merger or acquisition from using US-based equity crowdfunding. The proposed rules also require intermediaries to provide investor education, collect information about investor income and net worth, and abide by anti money laundering laws. The risk of fraud is to be managed by the intermediary FP.

While SEC Commissioner Aguilar noted that the new rules could help minorities and women, in later conversations with SEC Officials it became clear that they had no intention of using Title VII of the Act, which requires the SEC to reach out to women and minority owned companies to inform them about these new fundraising opportunities. This may be due to the lack of diversity on the SEC staff. Virtually none of the Senior Staff and actually none of the Commissioners are African American.

SEC Commissioner Gallagher supports proposal and said it would give effect to the will of Congress and the President. He noted that the proposal is carefully written not to add
friction and balances investor protection and innovation. Commissioner Stein noted the rule would allow investors to use the wisdom of the crowd to identify and reward good
ideas. Commissioner Piwowar noted that the JOBS Act forces SEC to think out of traditional
regulatory box and presents a number of challenges.